Madame Chairwoman and members of the Subcommittee, I am Jean Ann Fox, Director of Consumer Protection of the Consumer Federation of America (CFA). CFA is a non-profit association of some 260 pro-consumer groups that was founded in 1968 to advance the consumer interest through advocacy and education.

We appreciate the opportunity to testify on the issue of bank regulatory streamlining and reducing unnecessary regulatory burden on banks. The Chair's H.R. 1585, the "Depository Institution Regulatory Streamlining Act of 1999," provides benefits to federally chartered financial institutions but does not provide any direct benefits to consumers who use those financial institutions. Consumers are harmed by the failure to adjust federal laws and regulations as conditions and markets change, just as banks are burdened by out-dated requirements.

CFA strongly urges this Subcommittee to amend H.R. 1585 to update and streamline financial regulations to benefit consumers, not just banks. Failure to go forward with a balanced measure will be perceived as "business as usual" with banks having the inside track with Congress and their customers being ignored and neglected. CFA also urges this Subcommittee to address the deliberate use by payday lenders of federally chartered financial institutions to evade state laws that bar payday lending.

Last week President Clinton announced a ten-page plan for Financial Privacy and Consumer Protection in the 21^st Century. It is an excellent blueprint for protecting consumers in the rapidly-changing financial marketplace. The length and variety of issues included in the Plan speak volumes about the backlog of unmet consumer needs. Also last week, the Senate adopted S. 900, the financial modernization bill, without including any strong financial privacy or basic banking provisions.

Truth in Lending technical corrections embodied in Congressman LaFalce's H.R. 1332, at a minimum, should be added to H.R. 1585. The dollar limits set in 1968 have been eroded by inflation and no longer provide the intended protection to borrowers. The jurisdictional limits for the Truth in Lending Act and the Consumer Leasing Act should be raised from the current $25,000 to at least $50,000 so that these laws cover almost all consumer purchases involved. With the average price of new cars now over $22,000, the current credit and leasing laws do not cover many auto purchases or leases. The statutory damages should also be increased to maintain equivalent levels of protection.

CFA strongly supports completing the job of outlawing use of the archaic Rule of 78s to rebate unearned pre-computed interest on installment contracts. The Rule of 78s always overcharges borrowers who repay loans early, refinance, or default on loans. It is a "back-of-the-envelope" rough approximation of actuarial interest. The only reason this inaccurate rebate computation method is still used in this era of computers and handheld calculators is because it is a lucrative method of extracting higher interest than disclosed to borrowers. Congress has been gradually phasing out the use of the Rule since 1992. CFA urges the Subcommittee to add H.R. 1332 to this bill to finally retire the Rule of 78s.

Closing the National Bank Loophole for Payday Loans

Small loans based on personal checks are the fastest growing form of consumer credit. CFA conservatively estimated at least $1 billion in payday loan volume last fall. Check cashers, stand-alone lenders, and a handful of banks are making small sum, short term, very high rate loans that go by a variety of names: "payday loans," "cash advance loans," "check advance loans," or "deferred presentment services." Typically, a borrower writes a personal check payable to the lender for the amount he wishes to borrow plus the fee, either a percentage of the face value of the check or a fee per $100s loaned. Depending on the fee and the term, payday loans cost from 371% APR to almost 2,000% APR. On the due date, usually the borrower's next payday up to two weeks, the check is sent through the bank clearing system, the borrower redeems the check with cash to settle the debt, or the borrower renews or rolls-over the loan by paying the fee and extending the due date.

Consumers are harmed by three main abuses: Very high costs disguised by the relatively small loan amounts and terms, loan terms that keep borrowers in perpetual debt, and coercive debt collection practices including threats to bring criminal bad check charges when borrowers default. For more information about the payday loan phenomenon, please see the attached Appendix: "The Growth of Legal Loan Sharking: A Report on the Payday Loan Industry" issued by CFA in November 1998. These loans are not permitted in at least nineteen states. State attorneys general and state financial regulators have sued to enforce small loan laws, usury caps, and consumer protection laws. Private litigation and class action suits have been brought across the country.

I bring this issue to you today to request that the House Banking Committee close the national bank loophole now being used to evade state credit laws. Some payday lenders have decided to make their loans through federally chartered financial institutions located in states without interest rate or fee caps. This permits them to make loans at triple-digit interest rates across the country, including in states such as Virginia where payday lending is not permitted. At last fall's annual convention, a representative of the National Check Cashers Association informed check cashers from states where payday loans are banned to partner with national banks to get around state laws. The Pennsylvania Attorney General recently settled a case against National Cash Advance, acknowledging his inability to prevent the company from making loans if it affiliated with a national bank and got a state loan broker license.

The most visible payday loan/bank connection is the "Cash 'Til Payday" loan program of Dollar Financial Group and Eagle National Bank, an OCC-regulated bank located in Upper Darby, Pennsylvania. Eagle is exporting Pennsylvania's deregulated bank fees to make payday loans, charging $17.50 to loan $100 for two weeks (454% APR). In 1997, Eagle National Bank made 204,499 payday loans involving $31 million or 36% of Eagle's total loan volume. The payday loan arrangement between this check cashing chain and the national bank is under challenge in a national class action lawsuit filed in the Central District in California. CFA and other consumer groups filed protest letters with the Comptroller who gave the bank a "Satisfactory" CRA rating last year.

Since payday lenders have succeeded so well at using national banks, car title pawn companies are expected to follow suit. Title pawn companies make small loans secured by the title to cars and trucks in more than a dozen states where these loans are legal. The typical interest rate is 300% APR for a one month loan. In some states, consumers lose all their equity in vehicles that are repossessed and sold. A title loan company offered to halt its legislative fight to stay legal in Florida, mentioning that it could get a federal thrift charter. That would have the double benefit of allowing the title loan company to make its 300% loans across the country without regard to state laws while driving out of business its competitors in Florida. (The Florida legislature adjourned without any changes to its title loan law.)

There are at least two approaches for federal legislation to deal with high-cost payday lending. Congressman Bobby Rush introduced H.R. 1684 last week to set minimum standards for state payday loan laws, to limit the finance charges banks can make, and to require banks to comply with the payday loan laws of the state in which the borrower lives. A senior member of the House Banking Committee is considering legislation that simply prohibits banks from making loans based on personal checks or electronic withdrawals from accounts. This simple approach removes the national bank/thrift route around state usury, check-cashing, and small loan laws. Banks should not be in the business of profiteering from desperate borrowers by enticing consumers to write bad checks to borrow money at exorbitant rates. Since a few banks seem unable to pass up this lucrative business, Congress should streamline and simplify banking laws by prohibiting banks from making payday loans.

Thank you for this opportunity to share our views.